Observations focused on the problems of an underdeveloped country, Venezuela, with some serendipity about the world (orchids, techs, science, investments, politics) at large. A famous Venezuelan, Juan Pablo Perez Alfonzo, referred to oil as the devil's excrement. For countries, easy wealth appears indeed to be the sure path to failure. Venezuela might be a clear example of that.

Archive for October, 2013

Nelson Bocaranda reports in today El Universal that the nomme de plume Simón Andrés Zuñiga, frequently present in aporrea pontificating about economic matters corresponds to none other than Minister of Planning and former Minister of all things financial Jorge Giordani, citing as the source former Minister of Planning Felipe Perez.

I had read Zuñiga frequently, but if true his writings gain an added value because Zuñiga claims to be an economist. But Zuñiga frequently shows weak points on economic matters, citing isolated cases, like Argentina’s Caja de Conversión but ignoring other experiences on the matter. (Hong Kong anyone? Or Venezuela pre-1970?). In fact, he cites Ecuador as another example, suggesting that Correa can not remove the dollarization he inherited because of its political cost. In fact, Zuñiga’s arguments are dense on ideology and short on content.

Because it takes a very ideological point of view to suggest dollarization, or any sort of foreign exchange flexibility, would “bad” for the workers, given that Chavista policies have generated 1000%-plus inflation over the last 14 years, truly hurting the working class, which managed periods of prosperity only when the Government had the foreign currency to keep the parallel rate down and whose purchasing power is currently decimated.

While the articles show an understanding of how the parallel market and why you need funds to lower it (At least better than Minister of Oil and Energy has), it seems to blame everything on conspiracies, as well as a deep belief that exchange controls have to be in place, despite the fact that economic history shows their recurrent failure. The main conspiracy: That players want to benefit form the bounty that Cadivi represents, but Zuñiga, whether Giordani or not, fails to note that it has been those near the revolution that have benefitted the most from it.

In the latest move by the Maduro Government, the Vice-Presidency for the Supreme Social Happiness of of the Venezuelan people was created this week. While many have laughed at the idea, I disagree. I think this office was badly needed and will play an important role in celebrating life in Venezuela and making its citizens happy.

While there have been no details as to what the office will do, I can think of so many ways that it can celebrate and promote the happiness of all Venezuelans, particularly by pointing out happy events around the country, of which there are so many.

As an example, the Vice-Ministry could make sure to interview on TV anyone who managed to buy a package of corn flour, which has become one of the supreme moments of any Venezuelan’s life in the the last few months. And even if you think that finding toilet paper is another such happy moment, the Vice-Ministry could celebrate not only the finding of the roll of toilet paper by those citizens that lacked it, but more importantly recreate the moment of supreme happiness that represents using it for the first time after not having any for a while.

Since happiness is relative, imagine how happy someone that survives an express kidnapping is, another area where the Vice-Ministry is likely to have a strong participation.

It is unclear what the budget for the Vice-Ministry is, but there is some overlap in what it will do. For example, if you manage to get a new passport, should that be paid by the new Ministry, given the happiness that the moment will provide, or should it still be paid by the Ministry of the Interior? Same with Cadivi. If you get your foreign currency for travel, given the happiness that this induces in you and your family, should it come out of Cadivi’s budget or the Vice-Ministry?

The range and scope of the new office is so wide, that eventually the Vice Ministry may become the Government, since the role of Government is essentially to try to make the population happy. The danger however, is that the Vice-Ministry may one day join the opposition when it realizes that nothing will make the people happier than the departure of Chavismo from Government.

So, Minister of Finance and former Vice-President for the Economy Nelson Merentes presented the budget yesterday in front of the National Assembly and made us all feel at ease, projecting inflation for 2014 at “only” (my words) 26-28%.

But the whole speech was quite disturbing, if only because Minister Merentes suggested that the Venezuelan economy faced three perturbations: inflation, shortages and the foreign exchange system.

Well, when you think about it, there is only one perturbation: The Chavista-Madurista Government that imposed the exchange controls that have led to shortages and spent and printed money, causing inflation.

That is a single explanation, a single perturbation. But quite disturbing.

But maybe you can add a second one: The fact that the Venezuelan economy has been mismanaged by non-economists like Nelson Merentes for too long.

Because nobody understood what he meant when he said that inflation is “out of range”. Venezuelan inflation has been “out of range” for too long due to irresponsible policies and Government officials. Inflation is what it is, it has no range, ask Mugabe. Venezuela has the second highest inflation in the world. At least five times the rate of any other Latin American country.

Maybe Minister Merentes should coldly think about the numbers he presented. He is a mathematician after all, he knows no economics, but he should be able to at least understand orders of magnitude, no? For example:

-He proposed a budget of Bs. 550.36 billion Bolivars, US$ 87.37 billion dollars at the official rate of exchange, a full 38.8% higher than that presented a year ago by his predecessor the non-economist Jorge Giordani. But wait! Before you think about that 38.8%, it turns out that since it was presented and up to October 2013, the same budget has been increased by 61%. Yeap! With two months to go the Chavez/Maduro Government has spent a full 61% more than was budgeted.

-And if you compare the 2014 budget to the 2010 budget, as presented originally, which is the only fair comparison, the 2010 budget was only 159.40 billion Bs., so that the 2014 budget is “only” 3.45 times the budget of only three years ago.

-And in his budget, Merentes proposed to issue debt in the amount of Bs. 112.7 billion in 2014, which is an amount almost identical to the projected income of the Government from oil, which will be, according to the same presentation Bs. 114.59 billion in 2014. Think about it, the Government will issue debt equal to the amount of money it will receive from oil. Talk about being irresponsible.

-And in 2013, up to today, monetary liquidity has increased by 35.5%, a huge (and inflationary!) number and that if it grows like it did last year in the last two months, it will end growing by at least 50% by December 31st. (This happens every year, a huge jump in M2 due to seasonality)

But despite all of the above, Merentes called for the need to “investigate” why inflation in Venezuela has been in double digits for thirty years in Venezuela.

There is nothing to investigate: Irresponsible Governments is the explanation. Period.

And despite all this, Merentes projects GDP will grow between 4% and 6% in 2014. Funny, last year he projected 6% for 2013 and we are unlikely to go over 2%.

And, yes, there will be no devaluation…

At this point, the fantasy was complete, I changed channels and turned to watch a more realistic movie about a Martian invasion.

Yes, I have been traveling, but I have also been swamped with work, which happens a lot when traveling. But besides these factors, I just don’t want to be repetitive about what is going on in Venezuela. Everything just seems to be going downhill non stop. But if I thought I had heard everything about corruption, today the Minister for Sports tells us that her signature was faked in sixty files to request foreign currency for traveling sportsmen. Amazingly enough, a single “athlete” was given US$ 66 million over a period of a year and a half, according to the Minister.

What this says is that there is simply no control anywhere in Venezuela. If a single (and lowly) Minister’s signature can be faked and someone can obtain US$ 66 million illegally, imagine what a Minister of Finance or a Minister of Energy can sign for without anyone checking!

Even worse, is the ethical deterioration in that Ministry and among the “athletes”, including the Minister. Because she wants to protect the names of the people involved in order to “respect them as athletes”.

Say what?

These are people that faked signatures, newspaper clippings, trophies in order to rob the Venezuela people and she wants to respect them?

The only respect they deserve is jail. And the Minister should be fired for allowing this to happen. And the Comptroller of the Ministry too.

This is simply an insult to the average Venezuelan who is given a few hundred dollars after dozens of requests, checks and the like, while the Bolideportistas and the Boliestafadores can get anything they want. If Maduro wants to fight corruption, the first thing he will have to do is fire everyone around him and try to find someone within Chavismo that is still honest, which may be a tall task in itself given the immorality that this news represents.

Anyone that thinks they understand the sudden moves made by Nicolas Maduro during the last few weeks, should wait a while, because I don’t think the full picture is clear yet. What I do think is clear is two things: Maduro is not happy the way things are going, he knows his Government is not working well and the importance of Nelson Merentes has been substantially diminished.

In fact, Merentes’ slide seemed to begin earlier than two days ago, when in a puzzling move, Maduro failed to include him in his bombastically-named “Organo Supeiror para la Defensa de la Economia (OSDE)” , which was created on the last day of September and is presided by a General, whose power has been increasing, but despite its name, failed to include Merentes. This discrepancy was noted at the time, but nobody knew exactly what it really meant.

Merentes is clearly paying for his lack of accomplishments. The man that was supposed to be the “pragmatic” member of Maduro’s Caibent, was not energetic enough to push his agenda and the more ideologically minded members of the Cabinet managed to slow down all of his initiatives and Merentes has essentially nothing to show for his almost six months in the Ministry of Finance.

The second sudden move, was the removal of Maduro’s confidant Temir Porras from both the development bank Bandes and the development fund Fonden. Porras was a new figure in the economic side of the Government and had been reported to be Maduro’s sounding board on economic and financial matters. But faster that you could say Temir, he was pushed out last week with no explanation. And there is still no clear idea of what happened there, even if some suggests that Porras was removed due to Maduro’s displeasure with the French intelligent services pulling off the operation that allowed them to catch the drug in the Air France plane. Reportedly Porras’ inability to know about this forced him out. Others suggest that Porras’ team convinced Maduro that the Chinese would lend him the US$ 5 billion in cash, which did not happen.

Then this week, Merentes was removed as Vice President for the Economy, a position that is now occupied by the Minister f Energy and Mines and President of PDVSA Rafael Ramirez. This position is not that important, but there is a “Revolutionary” Cabinet above the crowded Cabinet, which is composed of six Vice Presidents. This supra-Cabinet meets more often with Maduro and is supposed to have a coordinating role.

It turns out that Ramirez was already part of this supra-Cabinet, so whether it has a meaning or not that he replaces Merentes is not that clear. Ramirez was previously the Vice President for Territorial Development, a position now occupied by General Hebert Garcia (More on him later)

Ramirez being the new Vice-President for the Economy may not be so bad as many think. He is considered to be part of the more ideological and radical branch of the Government, but he has shown in the past that he can be quite pragmatic. In fact, the only area where there have been some positive signs since Maduro took over has been in PDVSA’s flexibility, which has been led by Ramirez. Ramirez may actually be more capable of convincing the radicals that some change is needed.

The problem is that Ramirez is no economist and the change needed is more than a foreign exchange system, like Merentes seemed to think. What is needed is a larger adjustment of the economy and its variables, before distortions gets further out of hand. Ramirez will certainly not deliver that.

Caracas is full of rumors and among them, the possibility that Ramirez may also be moved sideways is one of them. PDVSA is where the money is and some Madurista groups may be trying to get closer to the honey pot and the Royal Family having a bigger influence there.

As for General Hebert Garcia, he now occupies three positions, the one in the supra-Cabinet, the President of Mision Vivienda and the President of OSDE, signifying that Maduro trusts him and he is the point military man to organize the economy and reduce shortages and build housing. Sounds like a tall order for a single person, let alone a Venezuelan General. But as PMB comments today, there seems to be this belief in Chavista circles that the military can organize things despite fifteen years of proving the contrary.

So, stay tuned, Maduro may yet make other moves pronto, which will allow us to better understand the ones he has made, excluding how he fell from that bicycle.

Nothing can illustrate better the lawlessness, irresponsibility and lack of equality that currently rules Venezuela that this item from the international news, accompanied by this item today.

First, we hear that the official (funcionario) from the National Institute for Sports (IND) was not involved in money laundering. It was not money laundering, because the guy was authorized. Never mind the law, whether Bulgarian or Venezuelan laws. Because in both countries, you have to declare cash above a certain amount.

According to this website, you have to declare above 8,000 leva in Bulgaria, whether you are importing or exporting them. That is about 4,000 euro if you were wondering. So, if Mr. Funcionario Official was carrying euro 407,000, he was money laundering, violating Bulgarian law, whether the Embassy likes it or not.

But incredibly, these “funcionarios” from the Bulgarian Embassy forget that we live in Venezuela, where you have to declare over US$ 10,000 when you leave the country. If you don’t, you were also money laundering.

A country where anyone, anyone “normal” of course, has to fill out and hand in folders to Cadivi, to obtain approval. We are talking about all sorts of forms, filled out individually, to get no more, that is the regulation, than US$ 3,000 in your credit card for travel abroad. Legally, there are no exceptions to these rules. It’s the law of the land. Except Chavismo seems to believe that the law only applies to everyone else. Particularly for non-Chavistas.

But really, do you trust a “funcionario” to carry that much cash in a country where nobody can carry cash in foreign currency? Who supervises handing out the cash? Spending it? Really, please….

How much cash did Maduro’s delegation carry in China? No wonder they wanted to get out of the airplane in Vancouver and go shopping after their sudden departure in Beijing…

But really. Think about it. In the country of controls, where to get even small nominal amounts, you have to submit folders, prove you are alive, got to the bank two or three times, get a ticket, get receipts, use only your credit card, except for small cash amounts, but some flunky is given over half a million euros to “carry”, like a drug mule, through the Maiquetia airport, the airport where you can get drugs out, only if you are exporting over a Ton a time, but not smaller amounts.

Same as with cash.

But just like you can not export drugs, it is illegal to export large amounts of cash, even if you are a Chavista. Except it seems as if cash is king for Chavistas. Remember Antonini? He was also above the law.

But somehow for Chavismo, it is one thing to be a member of PSUV, a Chavista, or you and me. This Government is all about discrimination. This Government is all about creating two classes of people. It is about having laws that apply to others, but not to you. Because they are the all powerful Government.

Except Bulgaria is not Venezuela, the same way that Argentina was not Venezuela, even if Antonini’s plane was chartered by PDVSA.

And these are the cases in which they get caught, imagine how many there are where nothing happens. Nobody gets caught. A million euros, two million euros? For Chavismo, the sky is the limit.

I mean, the country does not even have a Comptroller, just some flunky who is a member of PSUV and nobody knows her name. (I think it is a she). Becuase Chavismo does not one to appoint anyone who is not loyal to them.

Nobody is watching, Bolichicos y Bolichicas, take advantage of it.

Meanwhile, pendejos y pendejas (Buddies of mine). Fill out your forms. Hand in your folders. Travel. Spend you money wisely and legally. Hand in your receipts. Get ready to be suspended. Remember you are second class, even if you comply, they may still jail you. You are guilty until proven innocent.

Venezuelan and PDVSA bonds have not done well lately. While there was a nice rally in September, up to the US Federal Reserve announcing that it was not ready to reduce tapering, after that, they did not well, with a bounce on Friday due mostly to JP Morgan reiterating its overweight rating on the bonds,in a report entitled something something like “Venezuela: Bending, but not Breaking.

The graph for PDVSA 2022 is shown below:

That was quite a drop, almost 10 points since September 20th., except for Friday’s bounce.

Why has this happened? Essentially all news coming out of Caracas is negative. There is nothing positive happening and Maduro has been in power almost six months and very little has been done on economic policy. In fact, there has been total policy paralysis on economic matters since April.

In April, I suggested that investors reduce their position in Venezuela and PDVSA for the simple fact that bonds had gone up because “change” was expected, but as long as Giordani remained in the Cabinet, it was difficult to envision this change.

But for foreign investors signs are even worse, everything coming out of Caracas seems to be negative:

-There is total policy paralysis

-Sidetur bonds defaulted, the first time in 14 years the Chavista Government has allowed this to happen.

-Liquid international reserves are low. There is money in parallel funds,but people don’t know how much. Is Maduro willing or commited to pay as much as Chávez?

-PDVSA has failed to increase oil production significantly. Even more ominous, Lukoil and Petronas have decide to leave the partnerships they joined recently in thePetrocarabobo and Junin 6 fields.

-A new foreign exchange system, called Sicad was set up, but has failed to deliver foreign currency. No auctions have been held in four weeks in what was supposed to be a system that would regularly offer foreign currency to companies.

-The ICSID Court ruled against Venezuela in the ConocoPhillips case, which will eventually have a financial obligation attached. Given the uncertainty over the full amount, this implies an additional financial commitment in the future for the country.

-President Maduro went to China and while he failed to obtain a US$ 5 billion loan in cash, he did extend the Heavy Chinese Venezuela fund with a US$ 5 billion loan. This loan is an extension, which will allow Venezuela to buy Chinese goods in exchange for oil, constraining PDVSA’s cash flow from oil sales.

-The non-payment for the delivery of three oil tankers raises questions as to why PDVSA is holding back payment when the amounts involved are not significant.

-Investors are increasingly concerned that the Government will have to resort to issuance in the near future, if it wants to create any form of new foreign exchange market as resources to supply this market are limited at this time.

-The Government intervened paper product maker Manpa, sending another negative signal to markets. While the intervention is supposedly temporary, President Maduro has suggested a number of irregularities were found and the intervention will be extended.

-Meanwhile, President Maduro continues to blame the private sector for inflation and shortages.

-And oil could drop further now than Iran is talking to the US Government.

But in our opinion, all that is happening is that Venezuelan bonds are sort of resetting their expectations. While I do not expect the government or PDVSA to default or restructure in the next two years, one has to think back to what happened in 2011 when Hugo Chavez got sick. At that time, bonds were trading at a spread of 1,000 to 1,200 basis points to US treasuries, as shown in the curve below:

This is a plot of the country risk since 2011, expressed in basis points. As you can see, right before Chávez got sick, the price to insure Venezuela bonds for 5 years was oscillating between 1,000 basis points (19%) and 1,200 basis points (12%). The country risk (the price paid by people to insure Venezuela against default, dropped as low as 600 basis points, as people were betting that once Hugo was gone, there would be change in the way the country was run. However, since Maduro took over over five months ago, little has happened and people are getting concerned. The spread r country risk reached 1,030 on Friday.

Some people are so concerned that they think Venezuela or PDVSA will default soon. I don’t think this is the case. However, looking at the plot above, you can see that the credit risk spread can easily (or should?) go back to 1,200 basis points. Thus, this resetting of the curve is not something I am willing to ride out. Bonds will likely have further to drop.

Thus, I am telling people to simply lighten up on their Venezuela positions. Bonds could easily drop 10 more points, something most investors would have a hard time riding out.

In fact, just as Chávez was sick because of his health, I think Cristina is politically sick in Argentina and investors will bet that things will change down there and bonds from that country will rally sharply in the next couple of years. Even if nothing changes in the end in Argentina, just like in Venezuela.

Americo Da Grazia, the opposition Deputy from Bolivar State, the same one that was pushed down the stairs of the National Assembly a few months ago by a group of Chavista Deputies, gave this excellent speech during the discussion to approve a resolution backing Maduro’s decision to expel three US diplomats. Da Grazia is a member of Causa R, the Guayana socialist party associated with the union movement.

For those that do not speak Spanish, Da Grazia starts by showing his birth certificate and saying he is Venezuelan and where he was born. He then recalls the murder of a Causa R leader last weekend. He then says among other things:

-What a pity that this assembly refuses to discuss Venezuela’s problems.

-Pity you don’t care about what Venezuelans care about.

-We are not lackeys of the gringo empire, but we are also not lackeys of the Chinese empire. But you just gave away the Las Cristinas gold mine to the Chinese empire while on your knees. Shame on you!

-You also gave Guyana (the country) the disputed territory.

-You dont say anything or discuss anything about the Sidor strike, the Ferrominera strike or the miners that are in jail.

-Because of you electricity consumption is back to the 80’s in Guayana because you ruined the electric infrastructure. And you don’t talk about it.

-How many of you know that in Guayana there is not asingle hospital that can provide chemotherapy or radiotherapy treatment to cancer patients. single hospital that provides chemotherapy or radiotherapy to cancer patients, but then you want to discuss this “pendejada”.

-He then says ironically that he just told his daughter not to go to the market, because thanks to kicking out the americans, there will be no shortages, there will be toilet paper and the dollar will go down in price.

-He then calls them stupid and imbeciles.

-He then calls for a democratic solution to Venezuela’s political problem.

-He then mentions all the positions, CNE, Comptroller that need to be elected and says they are illegitimate.

So the terrible acts committed by the three american diplomats were visiting an opposition Mayor, visiting ONG Sumate, Bolivar branch and talking (not even shown) to Andres Velasquez and Maria Corina Machado.

This in a country where Cuban military officials boss around Venezuelan ones and are present everywhere.